What China’s new red dawn means for Hong Kong

What’s happened?

Last month China’s ultimate decision-making body, the Standing Committee of its rubber-stamp Parliament, passed sweeping reforms that further strengthen Beijing’s tight political control over Hong Kong. The measures slash the proportion of elected seats in the territory’s legislative assembly from 50% to 22%, and require all would-be MPs – as well as all other public officials – to be vetted for their “patriotism” by a pro-Beijing committee. The move prompted a further wave of arrests and convictions of dozens of pro-democracy politicians and activists. One of seven people convicted last week – over a peaceful demonstration in 2019 – was Martin Lee, the 82-year-old barrister known as the “father of democracy”. Lee once helped draft the Basic Law that underpinned Hong Kong’s relative freedoms after 1997. He now faces up to five years in jail for unlawful assembly.

So it’s now “one country, one system”?

It’s certainly a further decisive step on the road to a Hong Kong that is much more tightly integrated into mainland China – both politically and economically. The convictions of both Lee and media magnate Jimmy Lai are likely to set a precedent for several upcoming trials on similar charges of illegal assembly and protest. The year 2019 saw a wave of street protests and sit-ins in Hong Kong sparked by anger at a new law making its citizens liable to summary extradition to the mainland. Last year, Beijing forcefully signalled its patience was at an end and imposed a wide-ranging new national security law on Hong Kong, aimed at eradicating “splittism, subversion, terrorism, and any behaviour that gravely threatens national security and foreign interference”. In effect, it’s an anti-sedition law that gives Beijing very broad, greater powers to stifle dissent, and it’s the first time that a mainland criminal law has been introduced into Hong Kong’s semi-autonomous legal code.  

What about economic freedoms?

The Hong Kong government has long taken pride in the perception of its economy as one of the most liberal and open in the world – an international business hub with low tax rates and open ports. For 25 years it topped an “Index of Economic Freedom” published by the Heritage Foundation, a conservative US think tank, though last year it slipped to second place after Singapore. A few weeks ago, however, the Foundation took Hong Kong (and Macau) off its list completely. The move amplified the sense that the territory’s status as a global financial hub is now in real peril.How important is Hong Kong?

Hong Kong is crucially important to global markets as a key Asian financial hub and a unique conduit between China and the West. Last year the Hong Kong Stock Exchange ranked as the world’s second largest initial public offering market, raising a total of HK$389.9bn (£36bn) from 140 listings, according to KPMG, and beaten only by New York’s Nasdaq. In 2019 around US$10trn of US dollar transactions flowed through its bank-to-bank payments system. Some 420 hedge funds (80 more than Singapore) are based there, managing more assets than Singapore and Japan combined. It’s home to the global or regional HQs of 1,500 international firms. And, crucially, it is by far the pre-eminent dollar-funding centre in Asia.

Is it fading as a financial hub?

There’s no sign of that yet, and a surge of global capital seeking to reach Chinese markets has drawn even more investment to Hong Kong over the past year. In a long-established annual survey of global financial centres, updated last month, Hong Kong actually climbed a place from fifth to fourth, behind New York, London and Shanghai. Singapore came in fifth and Beijing sixth, while Tokyo dropped three places from fourth to seventh. The Global Financial Centres Index (GFCI) report cited the popularity of Hong Kong’s stockmarket for new listings, as well as the many cross-border trading schemes with the mainland, as key reasons for the territory’s ranking.

So nothing to worry about?

So long as Hong Kong retains a stable business environment, the free flow of capital, low tax rates and a reliable legal system based on English common law, it’s likely to keep its status as a global financial centre. But if the US were to target the dollar-payment system, or China’s communist party to destroy the independence of Hong Kong’s courts, judiciary and financial regulators, Hong Kong’s allure could fade fast. Moreover, Hong Kong is gradually becoming a centre of Chinese finance, rather than a global one. The share of mainland firms listed on its stockmarkets has risen fast, now accounting for 75% of overall market capitalisation. Last year more than 2,000 mainland mutual funds invested in Hong Kong, a jump of 268% in a year. And Chinese investors brought in net inflows of HK$672bn (£63bn) through an investment channel called “stock connect”, 170% up on the year before.

Will anything change?

Beijing is clearly betting that Hong Kong’s role as an Asian financial centre will mean it remains attractive to Western financial institutions, whatever their governments have to say. Any change is likely to be gradual and its importance as a gateway into China will remain, barring some big upset. Justin Tang, head of Asian research at United First Partners, says most banks with a presence in Hong Kong will also have a base in Singapore, but doubts that a sudden exodus is imminent. “Unless we see something really drastic in China, Hong Kong, the likes of what we are… seeing now on the streets of Myanmar, it’s going to be a slow burn if it’s going to happen,” he told The Daily Telegraph. Beijing is determined to rebuild Hong Kong, says The Economist, “The old Hong Kong is gone. Judge Xi’s China by what it builds in its place”.